Orderbook Design

Motivation for Orderbook Design

Orderbooks are currently the best mechanism for price discovery, and as they are, they have been widely used in financial markets since the inception of organized stock exchanges in the late 16th and early 17th centuries. While the format and technology of order books have evolved over time, their fundamental value of recording and organizing buy and sell orders in financial markets has remained consistent.

Having considered automated market makers (AMMs) and virtual AMMs, bonding curves, and peer-to-peer (P2P) protocols designs prevalent in DeFi, Bluefin chose the use orderbook design due to its performance and flexibility advantages, and scalability. Bluefin's current design combines a decentralized on-chain trading engine with an off-chain performant orderbook. The smart contracts are independent of the orderbooks, enabling fully on-chain permissionless trading on their own. The off-chain orderbook efficiently matches orders and subsequently sends them to the on-chain settlement engine for execution.

The advantages of using off-chain orderbooks in DeFi are:

• Performance. High-performance trading experiences with low-latency order execution and efficient matching are essential for efficient price discovery and a seamless trading experience.

• Flexibility. Support for a broader range of trading strategies, including algorithmic trading and market making conditional orders, is either impossible, slow or costly with AMMs or on-chain orderbooks.

• Scalability. Handling 10,000s of order-creation and cancellation requests per second without impacting the performance of the underlying blockchain is necessary to ensure that the trading value remains scalable as the user base grows.

• Security. Off-chain orderbooks maintain the security and transparency of decentralized systems, while allowing users to retain control of their funds. Orders are cryptographically signed, verified, and matched off-chain and then subsequently verified on-chain prior to settlement to ensure no tampering happens in the order lifecycle.

Disadvantages:

• Centralization: Off-chain orderbooks introduce a degree of centralization, as they rely on third-party systems for order matching and execution.

• Trust: Users must trust the off-chain orderbook provider to trigger and fairly execute their orders accurately.

Future Decentralization and Trust Minimization

Bluefin is committed to further decentralizing its platform to enhance security, transparency, and user control. As the DeFi and Web3 space evolves, we expect more decentralized order book management advancements and other trading innovations that empower scalability and security and enhance the overall trading experience. Future plans include:

• Decentralization of the Off-Chain Orderbook on Arbitrum: Implementing a network of nodes responsible for maintaining and updating the orderbook for the Arbitrum DEX, with nodes elected through Bluefin's governance system to ensure trust minimization. A decentralized off-chain order book system would work by distributing the responsibility of maintaining and updating the order book across a network of nodes rather than relying on a single entity. Implementing such a system would consist of multiple steps, including node selection, orderbook distribution, and order matching by nodes directly or via a decentralized sequencer, followed by validation and settlement.

• Governance Mechanisms: Introducing governance mechanisms that enable the community to participate in the platform's decision-making process, promoting decentralization and community involvement.

• Integration of Sui's On-Chain Orderbook: Enhancing Bluefin by integrating Sui's on-chain orderbook will provide familiar price discovery and support for complex trading strategies. Integrating on-chain books on a scalable blockchain combines the benefits of on-chain trading with off-chain order management thus delivering a flexible order creation and trade execution completely on-chain.

Combining the benefits of on-chain trading with the performance and flexibility of an off-chain orderbook, Bluefin delivers a superior trading experience that addresses the limitations of traditional decentralized platforms. With future plans to integrate Sui's on-chain order book and further decentralize the platform, Bluefin is committed to providing a more secure and transparent environment for traders while maintaining the performance and flexibility of off-chain orderbooks.